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Bona Fide Prospective Purchaser Defense – Buyers Be Careful

April 2011

Environmental Law

Legal Alerts

Two recent court cases are the first to consider the Post-2002 Bona Fide Prospective Purchaser (“BFPP”) defense to CERCLA liability, doing so in the context of cases initiated by purchasers to recover post-purchase cleanup costs. In a California case, the buyer established the protection, and in South Carolina case, the buyer did not.

In Ashley II of Charleston, LLC v. PCS Nitrogen, Inc., Civil Action No. 2:05-cv-2782-MBS, 2010 WL 4025885 (D.S.C., October 13, 2010), the South Carolina District Court found, after a thorough analysis of the BFPP requirements, that the buyer did not qualify for the BFPP defense because (1) the buyer did not prove that no disposals occurred on the site after its acquisition; (2) the indemnity provision of the sale contract constituted an affiliation between the buyer and a liable party, the seller; and (3) the buyer’s post-purchase failure to address recognized environmental conditions in a timely manner and remediate related contamination was not appropriate care. The Court seemed particularly concerned that the buyer had gone to great lengths to shield the seller from agency action. While shielding the seller undoubtedly seemed useful to minimize costs subject to the indemnity, it seemed to have created a sense that the purchaser had “played both sides against the middle.” It is difficult to say whether the indemnity alone would have defeated BFPP status in the eyes of this court, given the problematic, post-purchase conduct of the purchaser.

In 3000 E. Imperial, LLC v. Robertshaw Controls Co., Civil Action No. CV 08-3985 PA, 2010 WL 5464296 (C.D. Cal. December 29, 2010), the California Central District Court found that the buyer satisfied BFPP criteria by undertaking appropriate, pre-purchase diligence, and remediating the property, including draining solvent-containing underground tanks. The buyer had also obtained a finding from the state regulatory agency that it was a “bona fide purchaser” under California law. The Court disagreed with the defendant’s assertion that the buyer’s delay in excavating the underground tanks showed a lack of due care. The Court decided that the buyer had taken reasonable steps to stop any continuing or future releases of hazardous materials at the site, working under the direction of the California Department of Toxic Substances Control.

These decisions contain important lessons for prospective purchasers of contaminated property. First, in addition to conducting proper pre-purchase diligence, BFPPs must be able to demonstrate that after closing they have consistently used appropriate care in all aspects of managing potential hazardous substance conditions. It is important for a buyer to obtain the assistance of knowledgeable specialists not only to ensure proper due diligence is performed, but also to ensure compliance with the BFPP defense requirements after closing. It may be advisable for a buyer to engage with the state regulatory agency or EPA in a cleanup agreement that describes what the buyer must do to maintain BFPP protection. This appeared to be a substantial factor in the California Court’s decision.

Second, the South Carolina Court’s finding of affiliation between the buyer and seller on the basis of standard contract indemnity language may discourage buyers from including such language in the purchase/sale contract. Unfortunately, excluding this language may result in a higher purchase price, and discourage brownfield cleanups funded by buyers. We hope to see a different result in future cases where a buyer’s post-purchase conduct is found acceptable.

Clearly, a prospective purchaser should realize that it may have to litigate all the way to trial, to establish its status as a BFPP. Those litigation costs, and the ultimate likelihood of success, must be factored into the analysis of whether to purchase a particular piece of contaminated property.

The information in this newsletter is not intended to provide specific legal advice. You should consult with an attorney and not rely on any information contained herein regarding your specific situation.